On May 13, Standard & Poor's equity research group made changes to the S&P Top 10 portfolio -- those issues it considers to be the best candidates for capital gains over the next 6 to 12 months. Martek Biosciences (MATK), a maker of nutritional supplements and food ingredients, has been tapped to replace auto-products chain AutoZone (AZO).
AutoZone was removed from the portfolio after it was downgraded to 3 STARS (hold) from 5 STARS (strong buy) on May 13. S&P analyst Efraim Levy lowered the ranking on the shares, as the retailer reached S&P's price target. S&P's proprietary
discounted cash flow (DCF) model suggested an intrinsic value of $89 per share. While the shares could appreciate further, notes Levy, S&P considers the risk/reward balance less favorable.
S&P believes Martek has the potential to more than double revenues in fiscal 2003 (ending October), driven by increased market demand for infant formula containing its patented additive (see BW Online, 4/21/03, "Martek's Growth Factor "). Analyst Markos Kaminis sees operating earnings per share of 50 cents in fiscal 2003 and $1.31 in fiscal 2004. Based on free cash flow assumptions embedded in our DCF model, we calculate an intrinsic valuation for Martek of $41, which is also our 12-month price target for the shares.
Martek is ranked strong buy by S&P, along with the other names in the portfolio. Year-to-date through Apr. 30, the S&P Top Ten Portfolio gained 3.98%, slightly behind the 4.22% advance for its benchmark, the S&P 500-stock index.
Here's the latest list:
S&P Top 10 Portfolio
Attractive on a valuation basis
Boston Scientific (BSX)
Explosive growth prospects
Foreign exchange trends, recent share-price drop
Compass Bancshares (CBSS)
Valuation, positive fundamental trends
Dean Foods (DF)
New products, improved distribution
Jacobs Engineering (JEC)
See strong bookings from refining customers
Annual revenue growth of nearly 100% seen through fiscal 2004
Nabors Industries (NBR)
Natural-gas activity expected to rise
Trading at a discount to its industry peers
USA Interactive (USAI)
Rising Internet use and usage
For more information about the Top 10 portfolio, please visit http://www.businessweek.com/investor/content/jun2002/pi20020617_8998.htm By Ken Shea and Robert Gold